Citation: 2008TCC139
Date: 20080403
Docket: 2007-3530(EI)
BETWEEN:
LES SÉCHOIRS À BOIS RENÉ BERNARD LTÉE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from a decision in which the Minister of National Revenue ("the
Minister") determined that the worker, Daniel Bernard, held insurable
employment under a contract of service with Les Séchoirs à Bois
René Bernard Ltée from January 1, 2004 to June 9, 2005, even
though the employment was, in principle, excluded under paragraph 5(2)(i)
of the Employment Insurance Act ("the Act").
[2] The Minister relied
on the following assumptions of fact in making the decision under appeal:
[TRANSLATION]
5. . . .
(a)
The Appellant was
incorporated on September 30,
1974. (admitted)
(b)
The Appellant
operated a wood planing business and owned 23 kilns, two boilers and
planers. (admitted)
(c)
The Appellant
operated year‑round. (admitted)
(d)
The Appellant had
sales of about $4 to $5 million a year. (admitted)
(e)
The Appellant
employed about 40 employees.
(admitted)
(f)
The worker had worked
for the Appellant since 1986. (admitted)
(g)
The worker was in
charge of the Appellant's personnel management and production departments. (admitted)
(h)
The worker was
responsible for personnel management, the production equipment, purchases, the
maintenance of equipment and the sale of shavings. (admitted)
(i)
The worker worked at
the Appellant’s office. (denied)
(j)
The worker generally
worked Monday to Friday from 8:00 a.m. to 4:30 p.m.. (denied)
(k)
The worker was paid
$810 a week for 44 hours of work. (denied)
(l)
The worker’s annual
salary was $42,930. (admitted)
(m)
The worker took
two weeks of vacation during the construction holidays. (denied)
(n)
The Appellant had a
right of control over the worker. (admitted)
6.
. . .
(a)
The Appellant’s sole
shareholder was Placement René Bernard Inc. (admitted)
(b)
The shareholders of
Placements René Bernard Inc. with voting shares were:
|
René Bernard
Gestion Michel Bernard Inc
Placements Éric Bernard Inc
9071-4635 Québec Inc.
(admitted)
|
75% of the shares
11.11% of the shares
11.11% of the shares
2.78% of the shares
|
(c)
The shareholders of
9071‑4635 Québec Inc. were the worker, who owned 75% of the voting
shares, and the worker’s wife, who owned 25% of the voting shares. (admitted)
(d)
René Bernard is the
father of the worker, Michel Bernard and Éric Bernard. (admitted)
(e)
The worker is related
by blood to a group of persons that controls the Appellant. (admitted)
7.
. . .
(a)
According to Emploi‑Québec
records, salaries paid for positions similar to the worker’s varied between
$34,000 and $51,000. (denied)
(b)
André Audet, one
of the Appellant’s chief engineers with 35 10 years of experience,
had an annual salary of $58,264, but he worked 50 hours a week. (denied)
(c)
In 2004, the worker
did not receive a bonus from the Appellant but was paid an additional $9,100 by
9019‑4747 Québec Inc. (in which he was the majority shareholder
and which was responsible for transporting wood) and a $5,000 dividend by
9071‑4635 Québec Inc.. (denied)
(d)
The worker’s
remuneration was reasonable. (denied)
(e)
The terms and
conditions of the employment corresponded to those of an unrelated employee,
the work was done on the Appellant’s premises during the company’s business
hours and the worker’s responsibilities were commensurate with the experience
he had acquired over the years. (denied)
(f)
A relationship of
subordination existed between the Appellant and the worker. (denied)
(g)
The worker had worked
for the Appellant for about 20 years. (admitted)
(h)
The worker worked for
the Appellant year‑round. (admitted)
(i)
The duration of the
worker’s work was reasonable. (denied)
(j)
The worker’s work was
necessary and important to the smooth operation of the Appellant’s business.
(admitted)
(k)
The worker had been
employed by the Appellant since 1986, so that his expertise and
responsibilities increased over the years; a stranger would have acquired the
same experience as the worker. (denied)
(l)
The terms and
conditions and the nature and importance of the worker’s work were reasonable. (denied)
[3] After considering
the above‑mentioned assumptions of fact, the Minister concluded that,
having regard to all the circumstances of the employment, it was reasonable to
think that the Appellant and the worker would have entered into a substantially
similar contract of employment if they had been dealing with each other at arm's
length.
[4] Only
Daniel Bernard testified in support of the appeal. He explained that he
had started working for the Appellant when he was very young and had worked for
several years while he was in school. He explained that he had performed most
of the work to be done in operating the business.
[5] Although he went to
university in a field that had nothing to do with the company's line of
business (bachelor's degree in geography), he decided to quit school when he
was almost done and only his thesis remained so he could devote himself
completely to managing the business.
[6] He explained that
the business had had some problems due to unreliable employees. He therefore
took on a number of responsibilities so he could control the situation properly
from a management perspective.
[7] He further
testified that the activities of the business took place at
three different sites: the sawing operations were carried out at a
location about 60 kilometres away from the two places where the kilns
were located.
[8] Depending on the
period involved, the business had up to about 40 employees on its payroll.
Sawing activities were carried out during two shifts: one shift was for
pine and the night shift was for spruce.
[9] His two brothers
were each responsible for one shift.
[10] According to Daniel
Bernard, he was on call seven days a week, 24 hours a day, since his
presence might be required at any time, especially for drying, given the
importance of the boilers, which had to be watched constantly. He testified
that a camera system had been installed so he could make sure, from home or
elsewhere by Internet, inter alia, that the facilities were
operating properly at all times. He also stated that, even when he was away, he
contacted the business' staff every day to inquire about the situation.
[11] Drying activities
took place on two sites, one with 18 kilns and the other with
5 kilns. The site with 18 kilns operated with a boiler fed by wood
chips, while the site with 5 kilns was fuelled by natural gas. The
processes were highly sophisticated and required very special attention and
care on a constant basis, which explains why an alarm system and camera network
were installed.
[12] Daniel Bernard
was responsible for hiring and occasionally for dismissing employees. He enjoyed
considerable autonomy in making all decisions related to sound management.
However, he admitted that important decisions on the purchase of equipment were
made in consultation with his brothers.
[13] He testified that he
also had an interest in a transportation company and devoted about
10 percent of his time to that company. The rest of the time he had
available was devoted to the Appellant's activities.
[14] Daniel Bernard
explained that his annual salary for the work he did for the Appellant was $42,903.
[15] He also stated that
the annual salaries of four or five workers unrelated to the Appellant were
higher than his own.
[16] In light of this
testimony, certain assumptions of fact appear to have been completely rebutted.
I am referring in particular to the facts set out in subparagraphs 5(j)
and (k), which state that the worker generally worked Monday to Friday from
8:00 a.m. to 4:30 p.m. and was paid $810 a week for 44 hours of work.
[17] Moreover, the
Minister alleged in subparagraph 7(d) that the worker's remuneration was
reasonable. However, in subparagraph 7(b), the Minister submitted that
another employee had an annual salary of $58,264 based on 50 hours of
work, whereas the worker was paid $42,930 for 44 hours of work.
[18] The assumptions of
fact also state that, according to Emploi‑Québec records, salaries paid
for positions similar to the worker's varied between $34,000 and $51,000.
[19] No evidence was
provided to support this assertion. Furthermore, it would have been interesting
to know what was meant by "positions similar to the worker's".
[20] These are a few
elements to which significant weight was attached and which in no way
corresponded to the evidence adduced before the Court.
[21] How did the Minister
reach the conclusion that the remuneration paid for the work described by
Daniel Bernard was reasonable? It seems to me that the comparison made by
the Minister reflects an obvious lack of rigour.
[22] I can conclude from
this that the analysis was flawed because elements that had no basis in reality
were taken into consideration. Is it nonetheless reasonable to conclude that
the Appellant and the worker would have entered into a substantially similar
contract of employment if they had been dealing with each other at arm's length?
[23] It has been
established that Daniel Bernard's two brothers, who were each
responsible for one shift (one for the sawing of pine and the other for the
sawing of spruce), had salaries that were, all things considered, comparable to
Daniel's salary. The employment of Daniel Bernard's brothers was excluded
from insurable employment because they each owned 40 percent of the
company's shares. Daniel owned only 12 percent.
[24] When a decision is
made on the insurability of the employment of shareholders who are not dealing
with one another at arm's length, including shareholders who work for the
company whose shares they own, I believe it is important to consider the
parameters of similar situations in which an arm's length relationship did
exist.
[25] In this regard, I
stated the following in 9022‑0377 Québec inc. (Évasion Sports D.R.) v.
M.N.R., 2004‑3731(EI), 2005 TCC 474, at paragraphs 51‑59
inclusive:
51 I do not find
the comparison totally relevant because Pierre Deschênes did not have any
shares in the business. What a company demands and requires from its
shareholders holding employment in its commercial activities, after having
agreed to the terms and conditions of employment, has nothing to do with the
salary reserved, offered or agreed to by anyone without any shares in the
company.
52 When
shareholders in an arm’s length or non‑arm’s length relationship decide
to have a salary policy for the shareholders‑workers, be it stingy or
generous, very permissive or very restrictive, it has nothing to do with the
other employees’ conditions of employment.
53 If shareholders‑workers
agreed to the conditions, whether the conditions place them at an advantage or
disadvantage vis‑à‑vis other company employees, it has nothing to
with the existence of a non‑arm’s length relationship. The only relevant
question is whether or not there was work, remuneration, power of intervention
and control of the company over one or all of the shareholders‑workers.
If so, a contract of employment exists. In an exclusion as set forth in
paragraph 5(2)(i) of the Act, a comparison of the work must
be made between a shareholder‑worker in an arm’s length relationship, and
not with other employees who have no shares, even if shareholder status and
worker status are fundamentally different.
54 To argue the
contrary would create a serious inconsistency with respect to all SMEs where
shareholders who are dealing with each other at arm’s length decide to have a
particular policy for shareholders‑workers. Without being subject to the
exercise of discretionary power, given the absence of a non‑arm’s length
relationship, their work agreement would be deemed insurable, even if their
conditions of employment were extremely different from those of other workers
in the same company.
55 The very high
level of autonomy shared by the shareholders‑workers in the performance
of their work, the significance of the employment, the substantially lower or
higher salary of the shareholders‑workers with relation to the other
workers, the total absence of vacation or opportunity to take vacation without
greater notice than that of other employees, and so forth, are all elements
that shareholders‑workers dealing with each other at arm’s length cannot
invoke to exclude themselves from the obligation to pay premiums on the ground
that their work agreement is not a true contract of service.
56 Parliament made
an express stipulation on the issue of work performed by shareholders employed
in their business. It appears in paragraph 5(2)(b) of the Act,
which stipulates that the work performed by a shareholder‑worker or an
owner of more than 40% of voting shares is automatically excluded from
insurable employment.
57 The status of a
shareholder‑worker with less than 40% of voting shares is recognized
under the Act. Consequently, where one or more comparisons are required in a
case where a non‑arm’s length relationship exists, an analysis and
comparisons must be carried out between workers working in the same capacity or
capacities, and the shareholder capacity cannot be concealed from the analysis.
58 When a person
invests in an area in which he or she has no or little knowledge and his or her
co‑shareholders have the skill and expertise, it is completely natural to
leave it to them to ensure sound management of the business.
59 It therefore
becomes essential for that person to have some tools of control or
intervention. In this case, Denis Coiffier, in addition to the rights
conferred upon him through his 40% portion of shares, was probably the
instigator of the shareholder agreement that provided him with an additional
element to ensure the smooth operation of the company and the viability of his
investment.
[26] I have not changed
my approach to this matter.
[27] There are specific
rules or standards that must guide us in the exercise of making comparisons;
although a person may be both a worker and a shareholder in a business and
although those two statuses must be distinguished, the fact remains that the
expectations, objectives and concerns of a worker who is a shareholder may
differ from those of a worker who is not a shareholder without this changing
the nature of the contract of employment. A contract of employment has three
components: the performance of work, a relationship of subordination and remuneration.
[28] Remuneration may
vary depending on the person involved. It is not unusual or unreasonable for a
person to accept a salary that is below the norm for various reasons, such as a
desire to gain experience, the setting, the atmosphere, the context,
flexibility or reputation. Where the parties to a contract of employment have a
non‑arm's length relationship, this may have a perverse effect, since the
contract's specific characteristics may be attributed to that relationship even
where such a contract could have been entered into by parties dealing with each
other at arm's length.
[29] Although advantages
and disadvantages that are outside the norm are more common in working
relationships in which the parties are not dealing with each other at arm's length,
this does not mean that such a situation is exclusive to that type of working
relationship.
[30] When people
establish a company, they may very well agree on conditions of employment that
may seem from the outside to be strange or at least unusual. Such conditions
are generally inferior or very inferior to those that normally exist in the
labour market.
[31] Such people may have
very legitimate reasons for their actions. For example, one need only refer to
a situation in which, after a new company is created, the shareholders in an
arm's length relationship agree on minimal remuneration in order to strengthen
the new company's financial foundations, even though their work involves many
more hours and responsibilities than the norm.
[32] In the instant case,
Daniel Bernard's status as a shareholder with 20 percent of the
shares and as a worker was different from that of his brothers, since the
dividend was paid in proportion to each brother's share of the capital stock.
[33] However, where a
worker‑shareholder accepts inferior, disadvantageous or very unusual
conditions, there must be a reasonable explanation. This requirement applies
whether the worker‑shareholder is dealing with those in control of the
company at arm's length or not.
[34] In the instant case,
I think it would be completely unreasonable to imagine that a third party would
accept conditions of employment substantially similar to those of
Daniel Bernard.
[35] He held a strategic
position in the business, he worked many hours and his conditions of employment
were obviously more demanding than those of his two brothers.
[36] Despite all these
special characteristics, the only indirect remuneration he could hope for was a
benefit in proportion to his investment, since he owned only 20 percent of
the shares.
[37] Such a situation may
have been acceptable in a family context. However, if an arm's length
relationship had existed, the worker would obviously have been much more
demanding, particularly with regard to his salary.
[33] For these reasons, I
vacate the determination and find that the work is excluded from insurable
employment under paragraph 5(2)(i) of the Act.
Signed at Ottawa, Canada, this 3rd day of April 2008.
"Alain Tardif"
Translation certified true
on this 21st day of May 2008.
Brian McCordick, Translator
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